421-a Program Reforms Would Generate Increased Revenue for Affordable Housing

Mayor Michael R. Bloomberg today accepted and endorsed recommendations to reform the 421-a property tax program. The changes would modernize the program to foster the creation of housing for low- and middle-income families. The reforms are designed to create the maximum amount of affordable housing for the City while also ensuring that construction of new housing will continue at a strong pace.

The 421-a tax incentive program was created in 1971 to spur housing development at a time when housing market conditions were dire. Under the program, housing developers within designated areas are given tax incentives to develop housing. The program has helped fuel the construction of over 110,000 apartments in the City. However, the City's real estate market has changed dramatically since that time. In recognition of the need for reform of the program, the Mayor convened a 26-member task force in February 2006 to examine 421-a and suggest changes that would better align it with the current real estate environment. The task force was led by Housing Commissioner Shaun Donovan and included members of the real estate, community development, and advocacy communities, as well as representatives from City agencies and the City Council.

"I think these innovative recommendations strike the right balance to maintain a strong housing market while also providing funding for our aggressive plan to create affordable housing for 500,000 New Yorkers," said Mayor Bloomberg. "The task force's recommendations, which I endorse today, will ensure that the property tax programs the City has developed to spur housing production are working in the most efficient way. Last year the City authorized housing permits for 31,599 new units, the largest number of permits since 1972. So far this year we are on target to beat that number again."

"The task force is proposing solutions that will shape the City's housing market for the future," said Commissioner Donovan. "The strength of the current market provides a historic opportunity to place greater emphasis on encouraging the development of affordable housing throughout the city. These recommendations will both encourage new construction throughout the five boroughs and advance the Mayor's $7.5 billion New Housing Marketplace Plan, the largest municipal affordable housing plan in the nation's history. I want to thank all the members of the 421-a task force who shared their expertise and creativity."

"As a developer of affordable housing I am delighted to see a strong set of recommendations that seek to provide long lasting incentives and financing for affordable housing," said L&M Equity principal and task force member Ron Moelis.

"The task force brought together a diverse group of housing professionals with many different viewpoints but we reached consensus through a shared commitment to supporting affordable housing and leveraging the strength of the housing market to do so."

"The task force included members from all corners of the City's housing community and gained a surprising amount of consensus as to conclusions," said Adam Weinstein, president of Phipps Houses and task force member. "I think more affordable housing, including middle income housing, will get produced in a shorter period of time as a result of the recommendations. As an affordable housing developer and proponent, it is easy to forget that the 421-a programs were really borne of a different era, when the market environment was nowhere near as robust. We live in a very different time, and the mechanisms by which the City thinks about subsidizing affordable housing -- including real estate tax policy -- necessarily needed to be re-thought and re-purposed."

"The Task Force undertook a thorough analysis of the 421-a property tax program. The aim was to come up with a set of recommendations that would help to ensure that the program isn't overly generous to developers on the one hand and continues to stimulate the development of much-needed new housing on the other," said Ingrid Gould Ellen, Co-Director of NYU's Furman Center for Real Estate and Urban Policy and task force member. "Judging the right amount of subsidy to stimulate housing development is hard to do but given the existing evidence, the Task Force came up with a framework that I think strikes an appropriate balance."

The task force recommendations include:

Expanding the 421-a geographic exclusion area (GEA). The current exclusion zone, the area where developments are required to provide affordable housing in exchange for 421-a tax benefits, includes Manhattan from 14th Street to 96th Street and the Greenpoint-Williamsburg waterfront in Brooklyn. The expanded area would include neighborhoods with substantially high real estate values and significant zoning density: parts of Harlem, Lower Manhattan, DUMBO, Brooklyn Heights, and segments of the Brooklyn/Queens waterfront.

Granting twenty-five years of benefits only to developments that provide affordable housing. The reformed 421-a would allow only developments that provide affordable housing the maximum duration of benefits. Other developments would receive the standard fifteen-year 421-a tax benefits. Currently developments in neighborhoods such as Williamsburg in Brooklyn, Jackson Heights in Queens, Kingsbridge in the Bronx, Port Richmond in Staten Island and much of northern Manhattan can receive twenty-five years of benefits without providing affordable housing.

Setting a limit on the total amount of 421-a tax benefits that any market rate unit may receive. Only the first $100,000 of an apartment's assessed value would receive the 421-a tax exemption, currently there is no limit. Projects providing affordable housing on-site would not be subject to the cap, helping to increase the incentives to provide affordable housing.

Reserving 421-a tax benefits for projects with a minimum of six units. This is an increase from the current minimum of three units. Properties with fewer units are already tax advantaged because they are assessed at lower rates than are larger developments.

Abolishing the existing negotiable certificates program. This program allows developers in the geographic exclusion area to receive 421-a benefits in return for purchasing certificates sold by developers of affordable housing outside the exclusion zone.

Eliminating the certificate program would require market-rate developers in the GEA to pay full taxes unless providing affordable housing on-site. The result would increase tax revenue -- to be used for a dedicated affordable housing fund that could be insulated from the appropriations process -- and to encourage development of on-site affordable housing within the GEA.

Reviewing methods and practices for assessing residential projects. Because of constraints imposed by New York State law, real property tax assessments can vary widely between different property types and locations, bringing uncertainty to the marketplace. Assessing properties in a more transparent and consistent way would be a significant and important benefit for the City, so the Administration will work closely with the housing and real estate communities to seek improvements.

In addition to the dedicated affordable housing fund, the extra tax revenue generated by the proposed changes would provide at least $200 million to fund the Mayor's New Housing Marketplace Plan. The changes proposed will require City legislation. The City Council was represented on the task force and the administration will work with the Council as they consider legislation this fall. The administration will also work with the State Legislature as they consider renewal of the 421-a program, which otherwise will sunset on December 31, 2007.